Firebird Management's Steve Gorelik's Molina Healthcare Bull Thesis $MOH
Summary
Company Focus: The podcast discusses Molina Healthcare (ticker: MOH), a managed care organization specializing in Medicaid plans, with a market cap of approximately $10 billion and annual revenues of about $40 billion.
Investment Thesis: Molina is highlighted as a longtime compounder with a strong growth trajectory, currently trading at a low price-to-earnings ratio due to recent stock price declines, presenting a potential investment opportunity.
Industry Challenges: The healthcare sector, particularly Medicaid insurers, faces rising medical costs and regulatory headwinds, impacting profitability across the industry.
Competitive Advantage: Molina's lower administrative expenses and efficient cost management are emphasized as key differentiators, allowing it to remain profitable even as industry margins are pressured.
Growth Strategy: The company's growth strategy includes winning new tenders and acquiring underperforming insurers, with a focus on maintaining low costs and improving profitability.
Regulatory Risks: The potential impact of regulatory changes, such as Medicaid funding cuts and policy shifts, poses a risk to Molina's business model and future growth.
Management and Incentives: The CEO's significant stock ownership and incentive package tied to performance goals are noted as aligning management interests with shareholder value creation.
Market Outlook: Despite current challenges, the podcast suggests that Molina's efficient operations and strategic positioning could lead to continued growth and value creation for investors.
Transcript
You're about to listen to the yet another value podcast with your host me, Andrew Walker. Today's podcast I have Steve Gorick from Firebird. Back on the podcast, we talk about Molina Health. The ticker there is Mo. See the full disclaimer at the end of the podcast. It's a really fascinating conversation about a really interesting company. You know, this is a longtime compounder. Go look at the stock chart. It's just up and to the right, up to the right, up into the right. And then, you know, starting in July of this year, they get cut basically in half. So, you've got a company that's historically a compounder that is trading at 10xish price to earnings. Uh, should have a long runway for growth. You know, do they return to the compounder status or this is a company that does a lot of Medicaid? Is there a lot of regulatory headwinds, a lot of uh tax headwinds, a lot of all sorts of headwinds. So, really fascinating conversation. We touch on a bunch of different angles here. So, I think you're going to enjoy it. I certainly did. We're going to get there in one second. But first, a word from our sponsor. This podcast is sponsored by portraitanalytics.ai. AI. Portrait Analytics is a whole new way to use AI in investing. They've got a unique set of AI tools that will help you discover, research, and monitor new investment ideas with unprecedented depth, including allowing you to automatically screen and monitor your portfolio while creating summaries of trends and tailwinds that are driving your stocks. But don't just take my word for it. I had a listener email me and tell me, "I've never thanked anyone for helping me to spend thousands of dollars before, but I never would have heard about Portrait Analytics without your podcast, and I'm just thrilled with how much time it's freed up for me to do highle analysis and portfolio management. It's super accurate and reliable. It's been a complete game changer for me. Like my listener said, Portrait is simple to use, super fast, and really intuitive. Check out Portrait Analytics today and see how they can improve your research process." That's Portrait Analysts at portraitanalytics.ai. All right. Hello. Welcome to the yet another value podcast. I'm your host, Andrew Walker. With me today, I'm excited to have on for the second time, Steve Gorick from Firebird Management. Steve, how's it going? >> Hey, Andrew. Thanks for having me again. >> I I'm super excited for this podcast. It's a space near and dear to my heart. Before we get there, quick disclaimer, remind everyone, nothing on this podcast is investing advice. You can go listen to the full disclaimer at the end of the podcast. But Steve, the reason we're talking today is you did I I I think it was at at a conference, but I saw your deck. you did a big big presentation on Molina Healthcare. The ticker is MO. I think it's a super interesting space. You graciously decided to ask if you could come on the podcast. So, I'm super excited, but I'll just pause there and say, what is Molina Healthcare and why are they so interesting? >> Well, Andrew, thanks for that introduction and once again, thank you for having me uh come back to the podcast. Uh Molina Healthcare is a managed care organization. So it's a it's kind of you can think of it as a health insurer but they specialize in uh in running the governmentr run plans and specifically Medicaid plans and uh so they are while there's obviously all different kinds of insurance there's commercial insurance there's Medicaid there's Medicare uh Molina specializes in managing Medicaid plans the way that it usually works is that a so Medicaid is actually an in by the state. So the state decides who is covered uh what portion of the uh who is eligible for Medicaid coverage. They will put out a tender uh a request for proposal to all of the companies in the space uh that will asking to uh who is willing to cover the people and at a particular cost and then the managed care and once the companies that do win the tender and usually it's the population is splited between four or five different winners. The companies that do uh win the tender then actually provide the health insurance service. So they it's their job to find and contract the hospitals, the doctors etc. in order to uh provide the health services to the population that is covered by um uh by the uh by this uh plan. Molina has a market cap of about $10 billion. It covers roughly 5 million people which is >> for those watching the YouTube a little dash for it. >> Yes. up every time. >> Uh she just feels when I'm on I'm I'm on a podcast. >> Uh so uh it's uh it has about five million uh covers about 5 million people. Uh which actually is about 6% of the US population that is on Medicaid. So their market share is relatively small and I think they're the either the third or the fourth largest provider. The biggest ones are the people like Centi, United Healthcare. So other public listed companies. Uh so as I already said about 10 billion market cap uh and annual revenues of about 40 billion uh dollars it's it's actually a little more. The revenues have been growing by about 10 to 15% per year. They go grow through the combination of gaining share. So Molina is pretty effective at uh winning more than their fair share of vendors. Uh and I can get into later for why that is. uh and also through in in part through the acquisitions that they're making where they're buying underperforming um uh other providers in the space, not providers but other other uh insurers insurers in the space. Uh they're under uh they're buying the underperforming ones at a price that is usually quite attractive and then able to improve the profitability and deliver value to shareholders over time. >> That's a that's a great overview. Uh I've got tons of questions. Obviously, healthcare is a really interesting space just overall, but let's just start with elephant in the room. You know, I'm sure the first thing most people do you the the hundreds of thousands of people listening to this podcast, I'm sure the first thing they do when they see a stock is they pop this in, they start listening, and then they pull up the stock chart, right? And if you look at Molina's stock chart, again, the ticker is Mo, you're going to see a ch stock chart that for the past, you know, 20 years has generally been up and to the right. And then this year, you know, they start the year at 300. They continue kind of up and to the right. This stock peaks around 350 and then in July I mean the stock just gets hammered right 300 to 150 inside of a month starting July to the end of August. As you and I are talking the stocks kind of at 185 but the first thing on anyone's mind is going to be hey what drives a 50% decrease in this kind of in a month in this kind of compounder up into the right stock. >> Absolutely and that's a great question and I think you should also look not just at the stock chart of Molina but also at the other companies in the space. So if you look at centin if you look at unh which is slightly different animal elevance wellpoint healthcare so all of the insurers the stock chart will look more or less similar and uh there's two reasons for why we've seen this type of reaction uh one and the main one I think is the significant increase in medical costs so the way if we step back for a second in terms of how the profitability of these companies work for each $100 that they would receive in um uh from the state to help uh kind of to to manage manage the expenses. So >> they're capitated, right? If they take a hundred patients on the p the state may say, "Hey, great. Here's $1,000 per patient for all 100 patients. You guys go manage it. If it cost you $5,000, well, you're really in the hole. If it cost you $500, you guys are going to make a ton of profit." >> Well, so yes and no. So, and that's actually where the difference. So, let's say let's use a number of $1,000. It's actually a little different, but let's use a number of $1,000. The expectation is that out of $1,000 that the state pays to MCO like Molina, they will spend between $850 and $900 on medical costs. Those medical costs include preventative care, hospital care, drugs, you name it, everything combined. And then the remaining 10% is the potential profit for the company. But more often than not that is eaten up by the administrative expenses and and we can get into later. So that and if the number is below 85% and specifically with Medicaid if a number is below 85%. Then the insurers owe a refund to the state because saying well you didn't spend enough and this is actually what happened during co is because you didn't have not enough money was being spent on medical procedures because people were staying home and for various reasons. So at that point the medical costs for the industry fell below 85% insurers owe the refund to the state. What we're seeing right now is actually that but but the upside so from a point of view of what is the highest number for it usually doesn't reach 90 doesn't go above 90%. But right now it is and that is kind of the risk to your point this is the risk that the insurer takes on. uh and we went from that typical range of 85 to 90% and currently for the industry we stand at about 92 which is a big problem because the other part the administrative cost for the industry as a whole is usually around 9 10%. Meaning the industry is unprofitable. Molina and one of the reasons why I really like Molina especially the some of the other names in the space they are the most coste effective player in the space on the administrative side you can think about it kind of I'm a generalist I'm kind trying to put frameworks that work in other industries you can think of Molina as a company that because they are operating just with Medicaid just with these type of customers and they're super low cost they're the Walmart they're the lowcost carrier like Ryan Air they if we think of commodities they are the bottom quartile producer of a commodity from a point of view of costs so when the whole the rest of the industry is unprofitable which is what is the case now Molina is actually still making money not as much money as it used to so normally it operates at about a 4% margin and right now we're at about two so their profitability has half just like the stock stock did stock price did but there's still profitable while the rest of the industry is not. And that's a very important point. >> It's a great the main reason for why we saw the stock chart react as it has is because the medical costs are going up faster than the market has expected. And we can get into reasons for why that is. And what the insurers are saying is that we'll fix that through the higher rates because there is a mechanism to ask for higher rates from the states. and they're saying that we will fix that through this higher rates that we're going to be coming up uh that are going to be repricing call it next year but market is understandably uh understandably skeptical because they're thinking well maybe the the cost may continue to go up so that's the that's the summary great overview there's tons of stuff I want to dive in there but let me just step back before we start diving into specific points of the business and the business model I just want to ask you like the market's competitive place uh you know These are big health insurers, right? Even Molina, one of the smaller, these are big companies, well followed, well trafficked compounders for years. What are you seeing here that the market is missing that makes this kind of an alpha opportunity? >> No, that's a great question. I think what I see in there is that what we have is we have the whole industry is actually suffering from the same problems is that the medical costs are going up faster than uh both the insurers and the analysts have been expecting. What I see from a point of view of Molina and I already mentioned is that because they have lower administrative expenses ratio compared to everyone else. They are able to persevere and survive through this difficult period a lot more so than everyone else. And the other thing is that these insurers are operating at an extremely like if you look at the whole health care sector they have the lowest margin. So when we look at the providers the hospitals etc they will be operating somewhere between six and 10% operating margin. The best players in the space like HCA I think are around 15. When we look at the drug companies they're usually I think the operating margins are around 20 25%. So normal margin for insure is three two to 3% four and from that point of view they are and also the another thing to consider is that the states are not going to do this themselves because in order for a state to do this on their own they will have to do the same thing that what these insurers do which is building up the networks of pro uh building the networks providers figuring out how billing etc. and they do all of this for 2% margin. So from that point of view I'm not sure whether I'm missing something or not but I think I'm fairly comfort uh confident that the states are going to the insurers are going to be able to make a credible case for why they cannot continue to be losing money. Th >> this so let me dive into a few points there because those are great points and they they bring up some of the questions I've had when I've looked at these. I guess the first question is you made the case, hey, these are low margin businesses, right? They they're they're not taking much of which is good, but that brings me to two different points. So, I guess I'll start with the more financial point. I do hear you right all in like their profit margin, whatever it is, their administrative expense are small in the grand scheme of things, but if I just looked, you know, even this year after all the cuts, Molina is going to earn over a billion in net income. They're doing that on four billion of equity with two billion of that being tangible equity. Right? So their roe is somewhere between 25 to 25% to 50% depending if you're using return or return. Now a lot of this is administrative cost. It's a it's a low it's a low capital intensity business. But I would just say like these guys are like insurer/insurer adjacent. And if I look at that type of ROE, that type of return on tangible equity, I'd say, hey, that's really that's actually really high. Why shouldn't the, you know, in Medicare, if you're a company and your ROE, actually, again, they use profit margin for the most part, but if your profit margin gets too high, Medicare will just take reimbursement cuts to you. Why shouldn't the states be looking at this guy and say, "Hey, you're making 25% 50% returns on tangible equity. we need to take your uh required spend from 85 to 88 just because you shouldn't be making this much money administrating these plans. So that would be question one and then I have a a more healthcare focused question. >> Okay. So so I think the first question is actually the answer to it is relatively simple and and it and it goes with the administrative expenses point which I made a couple of times by now. The way that usually these procurements work is that and let's go back to a number of a thousand uh thousand dollars per patient. The there there is a procurement the state puts out an RFP and it selects four insurers called four or five insurers and each one of them gets the same $1,000 per patient. They will spend realistically more or less the same amount on medical costs. Some of them are a little better, some of them a little worse, but they will spend about the same. And let's let's pick a number. Let's let's pick a number that's at the bottom of the range, but let's say 90%. So meaning there's 10% left the rest of it. So the that 10% for most other players in the space, including the big guys like UNH, United Healthcare is eaten up by administrative expenses. And the only reason why Molina is profitable is because for them that number is not 10% but seven. >> Well, let's pause there then. This this jump >> they cannot but to your point they cannot say everyone else gets a,000 and you Molina gets 980. It doesn't work that way. >> Let's jump this is a little bit ahead of my question but I I think since you raised it raised a good question. They've got a slide in their investor from 2024 that shows they're outperforming their peers on everything, right? Their revenue growth has been higher. They've got better administrative expenses as you keep harping on which is a huge huge moat here. All sorts of stuff. But I would just ask why. Why do they have better administrative student expenses? Like if you told me, hey, United Healthcare, which is the largest company, has better administrative expenses because of economies of scale, better tech, whatever, I could start believing this is about the seventh largest, I believe, uh, insure. Why Why should the seventh largest insurer be so much better than everyone else on administrative expenses? Well, I would bring up an example from another industry. Why is Ryan Well, Ryan Air is maybe a bad example because they're quite large, quite large, but why is some of the low cost like Southwest Airlines or the Ryan Air, why are their costs so much lower than it is for the American Airlines or Continental etc. when we're talking about cost be meaning administrative cost is because so Molina has something called and this is some this actually it's interesting to look at the history of Molina because you could see their profitability changed from 2017 when the current leadership has come in this guy Joseky has been brought in from the outside this guy was initially I believe at Etna and he came in and he started installing what is what they call is Molina playbook which is and to me it's kind of similar to the Dana her And there's a number of examples of these uh from other industries where this focus on costs and efficiency and because they're only doing one thing is in their DNA. UNH, which is arguably a great company, and I don't want to spend too much time on it, but because they're doing different things and because they're operating most of the in uh most of the coverage that they provide is for the commercial plans where the medical costs are usually lower, they don't need to be as efficient on administrative expenses. So, this is where the specialization I think makes a huge difference. And this is and because Molina and if you look at before 2017, this was a public company before 2017. It was being run as a glorified nonprofit >> and it was because it was being run by the I think was by the two sons of the founder who was one was the CEO, one of the CFO. That is correct. >> It was a different company. It had higher expenses. They had both the administrative expenses and the medical costs. It was just not being run for profit. It was being run arguably you can call it public good or whatever it is but it wasn't being run for profit. It was growing very fast but it wasn't being run for profit. Since then since Joseky has come in has installed Molina playbook they have continued to deliver growth and continue to gain share but they're doing it from the position of the lowcost provider. And this is kind once again going back to the example of the airlines. There's a reason for why the lowcost carriers are gaining share against the full service providers is because they're providing what people need the b the basic part and not and not some of the other things. That's a great So, it is it's both one of the toughest and it's one of the toughest things, but when you get to write the best things for investors to bet on it, it is literally culture installed systems, like the stuff that I kind of hate because they don't they don't appear anywhere in the spreadsheets except for in the kind of profit margins and roe. You can't really read a 10K and say, "Oh, this company is so much better." It's just kind of in the results. Uh I do have a couple more questions along these lines, but anything else on what I just said or anything you were talking about that you want to hit hit on? >> No. So I think when you the other thing that we didn't really touch on for why these companies are cheap and this is kind of that's the that's the other question. I don't know to what extent you want to get into it is because if we look at the budget that was just passed the one big beautiful bill act >> that's where I was going next. Yes sir. >> Right. So uh if you look at that there are pro number of provisions in there that should reduce and the there's different estimates but uh most of the estimates say that it should reduce the number of people covered by Medicaid by about 10 million people. The current number in the country is about 80 million. So we're talking about and there's that number usually grows over time but we let's call it between 10 and 12% of the people will lose coverage and there's a big question of what does it mean? One of the so we kind of we started talking about for the reasons for why medical costs have been blown out. One of the reasons for why they have been higher than what people expected is because about two years ago after the co uh medical emermergency has been removed uh there was a process called redetermination. So if we step back for a second, what happened is that during CO because we had a medical emergency, anybody who had gained coverage for Medicaid during that period couldn't lose it. And usually the way that Medicaid works, it's a need, it's a needsbased um assistance. So if your life circumstances have improved, you found a job or whatever it is, then you you could lose your or quite often it actually it's because people have forgot to file paperwork the right way, but that's a different story. Um you have what what could happen is that pe people uh would normally lose coverage. they didn't lose that coverage for a couple of years and then when the Medicaid when the medical emergency uh status has been removed all of these people over a period of year lost uh eligibility and that was about 8% of the population that was on Medicaid at the time ended up losing the coverage. What happened during that time is that it just so happened that the people that lost carriage coverage were more often than not the healthier bunch because these are the people that did get a job or are younger. So as a result of that what happened is that because the healthier people got removed from the uh from the coverage the people who were left were less healthy and they needed more uh needed more medical expenses. So that's one of the reasons for what and this is something that insurers I don't think including Molina I don't think they have correctly estimated that when they were talking about the potential impact of redetermination they didn't correctly estimate what that could mean on medical costs and that's for one reasons for why we see the cost go up today and there's fear that with the kind of if the same thing will happen as far as the why people are losing uh coverage for Medicaid as a result of the new budget. >> No, that's great. I >> feel that that could happen again. And once again, we'll see another jump in cost. >> You know, I just when I'm looking at the financials, right, I've got the note from the 10 Q June 30 June 30th, 2024, 4.9 million Medicaid members and they've got 5.6 million overall. So, as they've said, their flagship is the Medicaid, right? That's their flagship. June 30th, 2024, they're down to under 4.8 million. So they shed, you know, a million or sorry, over 150,000 of their 5 million. So that's 3%. It's not nothing. It's not an insane number, but it's not nothing in your flagship franchise. And I think people are looking at, as you said, the one big beautiful bill cuts to Medicaid spending. It cuts to Medicaid spending, all this sort of stuff. And saying, "Hey, are you looking at are we going to be talking about 4.6 million members if we're fast forwarding 18 months?" >> So keep in mind, so they lost three. So yes, they lost about 2 to 3% of the members but the industry lost eight. So they gained share and as I was saying earlier they are gaining share as a result of winning tenders. So they win about 80% of the tenders that they choose to participate in and as a result of buying underperforming insurers. So over this time and their market share I was looking like their market share grows by about 0.2% per year. And if we're talking 80 million people, that's like 160,000 if I if I'm doing the math right per year. So from that point of view, and and they have and they actually do pretty good job. So you already mentioned of their uh 2024 investor day, they do pretty good job of explaining where the growth is going to be coming from. Uh and they're showing that uh because they they're estimating the re revenues will continue to grow at about mid-seen IRS between now and then. And they're saying that between now and then, between now and 2027, about twothirds of that growth has already been secured through the tenders that they want, but they didn't get put put in place yet and the acquisitions that they have made. >> Let me ask a separate question. So, we've talked a little bit about how well let's start with one other. You said a few times, hey, and when I was read when I was reading their 2024 investor day, which these these psychopaths, they had it two days after the presidential election and you know, how can you do that with this is a policy driven business, which I'll come back to in a second, but you know, when I reread that, they talked about rising costs and this was November 2024. The stock is 300. They talk about rising costs. They talk about all this sort of stuff and they talk about how it's a one-time thing, right? How they're getting it sorted out and then you fast forward it to July Q2 earnings, all that sort of stuff. The costs have really continue to rise. I guess I just want to know on the cost like healthcare inflation is not new to anyone, right? It's been off point for the past 30 years. You know, it's one of the first things I can remember from falling markets. Healthcare inflation is right. What is it particularly about healthcare inflation right now that is hitting these guys and everyone so hard and is going like so unexpectedly against their models? >> So one thing is this re redetermination process that I mentioned where you is and it's Medicaid specific where you had people roll off that were healthy. The other thing is and that's something that Molina has mentioned in their quarterly calls is they have underestimated to what extent people will be using things like the behavioral health uh services which it seems like it has become more pronounced that people are using behavioral health more so than they have done in the past. Maybe it's because the stigma about using this has gone away etc. But that is one of the things that they have addressed uh one of the things that they have mentioned. And then also you have the uh the usual culprits like the the drug prices going up. You have the salaries going up uh for uh for doctors and for nurses. So this you're absolutely right. the health care costs are going up and part of where the uh revenue growth for Molina has been coming from in the past is from average uh premium per person that they're earning usually goes up about four 5% per year and the key question is are they going to are the premiums going to go be going up in line with medical costs faster or slower and if we look at the history once again so when we're talking about medical costs they usually fluctuate between 86 and 90% And if medical costs go up faster, then you you will get the premiums repriced. Like if you look at the commentary from people like Sensing, so Sensing, which is they they're the only other public company I saw that is breaking out medical costs for Medicaid specifically because it's a big part of their business as well. For them, medical cost is 94%. Has been a lost for Molina, it was about 90.5 for 19.8, but for Sentinian, it's around 94. They are losing money. and they're saying that we will get rates that would be going up 10% plus and that's going to restore our operational cost. So medical costs will go up to to answer your question medical costs are going up but the question is what happens to the premium and I have to go back to the point is that if medical costs continue to go up faster than the premium the rest of industry will be losing money while while Molina will still be profit. Let me let me ask a higher level question. You know, these guys, I'm with you. The the medical cost, but these are policy dependent people, right? Like if I just said, "Hey, Steve, next year Medicaid's going away, right? This company would be in a lot of trouble, right? Medicaid is relying on the government." And I do think about the the kind of tail regulatory risk. I'm not saying Medicaid's going away. Though I do think part of the worry is the one the big beautiful bill or whatever it is uh does slash a lot of Medicaid funding stuff and I think people are worried about that all that sort of stuff. There's been debates over states optin on Medicaid for year. But if I just said to you, hey, you've got Molina right now trading at let's just call it 10 times price earnings historical compounder all these great sort of stuff you have. But then I said over the next 10 years, right? I I use 10 because 10 times price earnings 10 10 years o over the next 10 years you're going to have two presidential elections. We're going to be gearing up for a third and who knows what happens to Congress, the House, whatever. Medicaid is relying on federal regulations, right? And it is in the crosshairs. How do you get comfortable with kind of the tail risk that Medicaid either, you know, on one form doesn't get slashed by the federal government and these guys are kind of picking up scraps or on the other side, massive expansion of Medicaid to the point where maybe uh there's I I I think massive expansion would be great for them, but maybe massive expansion brings in huge competition or you you know, you could imagine five five different other lines where a massive expansion could change thinking. So how do you just think about that regulatory tail risk in a regulatory driven uh business? >> So massive expansion honestly I haven't thought about but I think to your point I think it would be positive for them because it increases addressable market size for them and they are as you said yourself earlier there's plenty of competition in the field to start with. It's just a question of who can do it more cost efficiently and and I keep arguing that Molina can do that more so than others. As far as the risk of Medicaid going away completely, what I would say is that you have 80 million people under coverage right now. I think it's what 25% of US population. Medicare is another 60 million people. Some of it is double counted, but that's on its own about 20% of US population. All these people vote. And I don't think that any politician would take steps to completely remove this coverage because then you have to come up with a way to cover these people uh provide healthcare another way Medicaid and Medicare. So we and we can step back for a second and talk about kind of effectiveness of US health care and the amount of money that we're spending in US which is I think $17,000 per person or how effective that is. But that is double what everyone else spends in the world. Other OECD countries spend in the world on healthcare. Medicaid and Medicare is actually more costefficient way to provide healthcare than it is for industry as a whole. So if you're talking about a a way to so and right now we're spending 17% of GDP on healthcare costs which is double of what other countries spend. So if there is a solution and I'm not advocating government healthcare in any in any way but if there is a solution anywhere it more likely than to the problem of health care costs rising it looks more like what Molina is doing than what private insurers are doing. Let me ask you a question on uh you know there's been a lot of I think rage is the right term at health insurance health insurance stock you know I the obviously unh one of their uh top brass got literally murdered in the streets of New York City a few months ago but you know I think a lot of it has centered around denials right and we've talked a lot about hey these guys they have to pay out 85 to 90% of what's given but I think a lot of skeptics say hey what they do is they go and price let's use our $1,000 per head, right? They use that and they say, "Great. We're going to pay out $850 per head and then we'll have five $5 per head of administrative expenses. Then we have 10% profit margins." I think what a lot of people do is they say, "Hey, these guys just bid." And then they just deny down to the numbers. So even if something's medically necessary, and you'll see lots of physicians say this, right? Like, "Hey, we're getting denied medically necessary treatment by these guys, and they're doing this because they want to fit us into their cap rate." Right? when you're bidding, your incentive is just to deny, deny, deny, deny, deny down. So, I I want to ask you, it's hard to capture if you know, if you and I were running a health insurance company and we were denying 100% of claims or 99%, we could say, "Hey, we cover people way cheaper than Molina Health is. Now, we're providing terrible service." I just, how do you think about that denial issue? Because I know that it is out there, and I'm not saying it's Molina specific, but I know that it's out there. I know it's something that the health care companies especially the insurance are addressing. I know it's part of the rage at them. So how do you kind of think about that in the long run and just as you think about these companies? >> So there I think there should be a distinction between denying claims and denying procedures. So denying >> Yes, please. and please make that distinction. Yes. >> Right. So den when you denying claims is when some when a procedure has already happened and you have a hospital that's putting putting through uh the code for the insurance to cover this and then they say no we're not going to cover it and then uh with private insurance that cost falls uh on the person and then that ends up you you have a lot of the stories of people going bankrupt and it's a dis and like the system is messed up. what there's but there's also a question of uh whether the procedures that you you're applying for whether they're necessary or not and then so Molina if you look at the kind of and I was trying to dig into well why are they you know they're saying the medical costs are better than average for the industry it actually is about the same if you look at the uh numbers for the industry as a whole um and compared to what Molina is drawing it's about it's it's within uh kind of within range But there are articles out there that saying that Molina will deny procedures more often than other people and that could be one of the ways that uh they are managing claims. But if we step managing their medical costs but if we step back for a second and so once again if we look at the so this is not any patient specific because you can always come up with a anecdotal evidence for somebody that needs to be covered but they're not. But if we look at the US system as a whole, it's actually quite interesting because what you have is on average the number of visits per person in US is lower than for other OECD countries. I think it's four compared to 6,000 people. But the average cost per visit is higher if because there's more procedures happening within these visits. So there's 50% more MRIs. There's I think statistics say that there's 50% more stances being installed in in in cases of some kind of cardiac problems. So once the people come in, they're being overtreated which all costs money but doesn't get us better results. So the life expectancy is worse. There's a lot of different ways where US despite spending twice as much as every other any other wealthy country, US is getting worse results. So from the point of view, if we step back for a second, the client that is deciding whether who is Molina is going to cover is actually at the state. From the state's point of view, they need to provide coverage to the people that keeps them healthy. And if the deni and molina or other insurers start reducing the number of approved procedures because those procedures are unnecessary from the point of view of the outcomes there's no difference. Yes there's some bad headlines but from the point of view of outcomes more likely than not there is no difference. So from that point of view when we're talking about specific cases there's going to be situations where the insurers will make a mistake. Absolutely. But overall US spends too much money on healthcare. And part of reason for why I think we see higher cost in private insurance than we do in Medicaid is because they have higher approval rates. Right? So in Medicaid there's more denials of procedures because it's saying well you don't need it or we will only do it for this price and that's why the cost. >> So I guess what you're saying is in your view Medicaid is they do deny more. Now it's not the denial of procedures that's already happened issue that we've talked about that's it. But they they do deny more procedures but in your view it's actually uh kind of they're they're denying a lot of overt treatment. you you actually think this is a a cure if I I'm saying that correctly. >> It's a it's a I don't want it's a cure to higher costs. It's a cure to cost going up all the uh in the system all the time because it's it's statistically proven that there is more procedures being done in US without better outcomes. I guess you know I know and again now I'm kind of beyond my depth. I'm just knowing what I've seen. I know a lot of doctors and places don't take Medicaid right >> now. Is that because like I I think if I'm going with your point of view, it's because these doctors I mean private insurance pays higher than Medicaid, right? So they're deny it because they'd rather get private insurance, but I I had thought Medicaid just because these states didn't want this or because of Molen and stuff, they were just underchar they were underpaying places, right? But you're saying what they're actually doing is uh they're kind of paying correctly and private insurers are just paying too richly. Is am I stating that correctly? >> Uh yeah, I think that's a fair statement. So uh when so one of the benefit of being benefits of being in general is because we looked at different things over time. So when I when I spoke to when I was looking at the providers and was speaking to them about well kind of how does your profitability work what they what they were saying is that I think it was we lose money on Medicare patients we break even on Medicaid patients and we make all of the money on private insurance patients >> and the profitability depends on the mix that was that was that's what they were saying >> so because there's because there's separation of who pays who gets treated and with private insurance it's even worse because like it's usually it's usually to the employer who pays as opposed to the state and employer for employer is just one of the costs of having the people people on the payroll. That's what that's where that's why those costs are higher than they are for uh for Medicaid and Medicaid does pay less because they negotiate a they negotiate a low lower price and they will pay less for the procedures and to your point some do some doctors will say I will accept it and others say they will not. But one of the things that a very important thing during tenders what uh companies like Molina have to provide and they they talk about that there's about a 2-year um kind of before you can tender there's about two-year period where you are aligning all of the providers that will be providing the medical services to make sure the state wants to make sure that a person will get the coverage that they Right. And that's where actually presence in the states or sometimes and so Molina is is present in some states and not in others and additional vendors that they're doing. It's actually they're already utilizing the same uh network of doctors and hospitals etc. and being able to provide using the same network of doctors. >> That's perfect. Um, I I I want to talk about M&A real quick, but before I I I do there, let me I've I've walked through a couple of different risks or just questions I've had when I've looked at these businesses. And look, I I'm I'm a value investor. You know, I do remember people when UNH UNH was the headline one because, you know, people instantly started saying, "Hey, look at this thing. Look at this stock chart. Let's buy, you know, on a sentiment driven thing, I think." And it's worked out, I'd say, mix for them. If you started buying at 400 when it was down from I I think 600, you haven't done that well. If you started buying at in the high 200s and now it's at 350, you've done pretty well. But I I I guess just having looked at these for a while, we I've walked through a lot of just the random risks that have popped through my head. I just want to ask you, having spent a lot more time on this than me, what kind of keeps you up at night having investment in Molina, right? Like it trades for a low price to earnings. Yes, they've reset a lot of the stuff, but it seems they're temporary headwinds. You've got this great growth outlook. You've got a team that's proven they can do it. What keeps you up at night? What makes you think you might lose money on this investment? >> Yeah, I think what what could break this thesis if the medical costs to your point, and that's something that we discussed earlier, is that the medical costs continue to go up faster than the than the rates. You could have irrational um policy that impacts uh Medicaid in general. And I mean you you could see that with with the with the budget the fact that people are losing Medicaid coverage and that's clearly like that's a negative for the industry. So if you will have uh once again like 10% of the people lose coverage once against the healthy healthier uh group group of people you can have this the period in which the profitability will be lower will be extended. So we're not going to see when you look at company like so if you look at company like sentin that's in the same space I think they have I think 180 billion in revenue and it's a company with 16 16 billion market cap if you apply the normal margin that they used to earn in the past to their numbers the upside is so much and the normal P multiple the upside is so much more than here I like Molina more because I think it's able to persevere through a longer period of disruption than any than other players in the space. And to your point, what keeps me up at night, if I was investor in Centine, I would be very much worried about how long this period takes for them to for the for the rates to catch up with medical cost of Molina because their profitability went down from 4% to 2% but they are still profitable. I'm a lot more comfortable sleeping at night here. And if we kind of if this stock wouldn't trade for the next five years, so so to to Buffett's point, if this stock wouldn't trade for the next five years, do you tell me the market is going to be closed tomorrow? I would be very comfortable with that. >> So in many ways, if I'm just kind of like flipping about mental models, what you what you think you have here is you've got the Exxon Mobile of Medicaid, right? Like they have the they are the lowest cost producers, but in part because of I mean Exon Mobile, >> I have the Walmart of retail. I don't think I don't think >> Walmart agrees on what you said. >> Yeah, Exon is not the most >> you know I I I do already see where you're coming from Walmart, but they're the most efficient. They're the mo lowest cost producer. So, yes, the industry is going through kind of a trout. That's why I chose Exxon because I was going they're going through a truth. But these guys, you know, they're still quite profitable while the industry is going through their trial and everyone else is just bleeding bleeding money. So what's going to happen is at some point the governments have to stabilize this because or else you'll just have every single player will exit the system and nobody will provide Medicaid coverage and >> and some Exactly. and somebody has to do it. >> Yeah. >> So it either has to be an MCO like Molina or it has to be the government itself and they're not going to be able to do it cheaper. >> Okay, that makes total sense. Made total sense. Uh I just want to ask quickly on acquisitions. I I think you've actually touched on the reason why, but I'll still ask because I had um you know, when they talk about their growth, they talk about double digit growth. You can go read their 2024 investor day. They're they're actually still hitting that on the revenue side. It's the cost as you've said that's caused, but their growth is split >> pretty much evenly between organic where they win new business or add more members and inorganic where they go and acquire plans. And I just want to talk a little bit about their inorganic M&A expansion plans because I I'm surprised that there's still small bolt-ons for these guys to do when it seems like the industry has consolidated so much if that makes sense. So I don't I don't remember the numbers exactly but I think if we look at the top five players so the uh Centine uh United Healthcare Wellpoint Humanana Molina they're only like 50% of the industry in terms of the Medicaid coverage >> and the rest is these smaller players >> in that that maybe are present in one or two states or more often not just one state that are covering 100,000 50,000 200,000 people because of the tender that they have wanted And these are exactly the type of companies that Molina usually buys because these guys usually are unprofitable. So they do have revenues, they do have members, but they don't have profits. And Molita usually when they but they so going back to the point of administrative expenses, they will buy guys that have administrative expenses of 10 11%. The medical costs may be the same, maybe a little higher, maybe a little lower, but they will buy guys that have administrative expenses of 10 to 12%. And then they put them through Molina playbook to bring those costs within two to three years down to their levels and have the same profitability. So if you look at the amount of money, I think they spent something like $2.6 six billion dollars in acquisitions over the last um five years. They have acquired about 1.2 million members as a result of this they have acquired about 9 or 10 billion of revenues and if you put their normal margin of what they're earning on this they paid somewhere between five and 12p. So if you apply today's margin it's 12p. If it's their normal margin it's like four. So again, you can pick any number in between. So it seems like a not and to your point and the my company makes the same point, the return on equity is quite high and that return on equity includes the returns on acquisitions. I'm reading the John Malone came out with the memoir and I'm reading it right now and it's funny because what you described is very much like how John Malone talked about TCI in the 80s, their acquisition program, where they just said, "Hey, we're the biggest. We go by we'll go by a small cable company that's making no money, but we know exactly what we're going to take their SGNA down to. We're going to get uh a little bit of benefit because we've got the best programming cost. So, between getting the best programming cost and knowing exactly where the M&A program goes to, like it was almost impossible for them not to accretively acquire someone. And uh this just fits that acquisition model to the tea. And the unfortunate thing is there is a limit to how much they can do it. But the fortunate thing is I I think they've got years of continued bolt-on acquisitions and they always say, "Hey, the pipeline is is kind of popping and everything." Steph, I think we've actually covered most of the stuff I wanted to talk about here. I I I just want to pause here. Is there anything else you think we should be talking about or listener you think listeners should be thinking about when it comes to uh Molina? >> Uh so I don't know to what extent that makes big difference or not, but I did mention the CEO who's been there from 2017. uh he owns uh about 400,000 shares which is uh what is it about 80 90 million so I mean he >> used used to be about 200 250 million >> so he he he he gets paid reasonably well uh I think it was last year that he got and he's about 67 years old and they want him around so they gave him an incentive package to st stick stick around through 2027 through which If he sticks around with 2027 and the company achieves $36 of EPS, by 2027, he gets another 150,000 shares, >> it's a lot of money, >> which is, you know, I'm guessing he's reasonably well off, but it's but it's a number that makes a difference, especially if you put a 10p on on 36. Like, it will be something. Look, you know, it's one of those things where Elon Musk buys a billion dollars of Tesla on the open market and people say, "Well, you know, it's funny to say this. Well, Elon's a trillionaire or whatever he is, right? Like 500 billionaire. This is not that big of an insider purchase for him." And it's like, I hear you, but it is a billion dollars. Like, he cares. And you know, in this case, we just walked through, hey, the the CEO owns, let's just call it 100 million of stock to make the numbers really easy. People can call it whatever that they want. >> $150,000. And as you said, if they do $36 in EPS, it's going to be it's not going to be a $200 stock. It's going to be $400, $560. So, but you know, $150,000 shares, he's going to get 30 million 45 million in stock and comp if he hits it. >> 60 million. >> Yeah. 60 mill that it's half the net worth we just talked about. He's gonna want that. He's gonna want that. He's gonna pull every libert to hit that. >> And it's not lost on me. Like, you know, they they paused their share buybacks. I I believe I I'd have to, but they they buy back about 2% of their shares. They pause it in 2020 in late 2024 when the stocks at 350. Based on how they're talking, I wouldn't be surprised if they're ramping up share buybacks right now. And between that plus inorganic growth, like you can get really accreative. They they get a long way to that 36 just between buybacks and inorganic growth I think. >> Yeah. So they bought back half a billion in the first quarter. They haven't done much in the second quarter but I think they are I think to some extent they saw a deterioration at MCRS and they want to take a pause and and arguably that's a it's a smart decision. What they're doing right now we'll find out in Q3 when they report Q3. I think it's going to be it's going to be a pretty important data point whether they continue continue to buy back shares which means they're comfortable or no they're still pausing and that's going to be important to look at but yeah no I think I think we did cover that >> that's great that's great uh what about would Molina I think there's been rumors some rumblings pass would a United Healthcare or you pick your company Sentine whoever would they would Molina be an acquisition target or between reg DOJ risks Plus, you know, companies with unique cultures tend to be difficult to bolt into bigger companies. Between those two, would is this not a great kind of get acquired? >> Yeah, I don't think Elh has a problem of being too small. Uh, and yes, so I think this is a company that has a different culture. Um, could you buy Molina as a way of fixing your own problems? I guess it's plausible, but none of these come. You can't really use you're not going to use your own shares because they're trading the you can have a merger merger like share for share merger. You can do something like that. I honestly didn't think about it from that point of view. Uh could it be a target? Like we're talking about a $10 billion company. It could be taken private like it's not that huge. Um but but I honestly I I prefer it because I do want to your point that this is a company that has compounded from 2017 even to this day with a share price uh down by 50%. Since Joseph Britzky came in they still compounded at 11% the shares have compounded 11%. Operating cash flow per share which is the metric that we're looking at has compounded at 30%. I'm not saying it's going to compound at 30% from here, but if it compounds at 15 to 20%, I want to keep it for the next 5 10 years, and I think they have the runway to do that. >> Is there any Scooby-Dooing going on here? >> Uh, not that I know. I the the only reason I asked for those who don't know someone at Firebird posted one of my favorite posts of the this month which was uh when a company's management team is intentionally trying to drive the stock down. They they call it Scooby-Dooing because you're the meddlesome kids who are getting in the way of the co if as an analyst you're the medalsome kids who are buying the stock up and getting in the way of the management team driving their stock down. You tell me if I'm saying it wrong, but >> No, you you you're saying this right and I think it's a good opportunity to give a shout out to my my partner Harvey Weeken who wrote that and this is it's his substack. He I think he's he's a phenomenal manager and phenomenal writer and he's really enjoying doing this. So anyone who is listening to this and doesn't follow it, I think they will probably enjoy doing that. >> I I loved the piece. I love the framework. The only thing my only criticism of it would be in the past like he is right. Again I'm reading the John Malone book and I think John Malone the reason he got so rich is he very much Scooby-Dooed when TCI spun out Liberty Media. He very much scooby-Dooed that in my opinion. I'm sure it was 30 years ago. Who cares? But my my only push back on the Scooby-Doo is sometimes I'll talk to management teams. I'll be like I didn't know the term but I'll be like these guys are Scooby-Doo doing it. They're trying to depress the stock price. And then what it actually is is no, these guys suck and they're just the stock is going down because they're really bad. >> It's a great question and I would say that it's something it's a question that we should be asking as analysts all the time. Any company we're looking at, I think these guys have a track record of delivering results. >> Yep. >> I I I only asked because I wanted to bring up Scooby-Doo. I'll ask you this >> and I appreciate that you did. >> Give me a company that's Scooby-Doo in their stock right now. Uh, sorry. Pass. >> Oh man, I knew I knew I was putting you on the spot. I knew it was a tough one. I was hoping to to pull it out. This is good. Uh, Steve, this has been awesome. I've really enjoyed this. Again, I've I didn't even know Falling Knife until I was prepared for this podcast. I didn't even know, but I've just really enjoyed following Firebird stuff. Really appreciate you coming on and uh looking forward to having you on for the third time. >> Thank you, Andrea. This was a pleasure. Thanks again. >> A quick disclaimer, nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial adviser. Thanks.
Firebird Management's Steve Gorelik's Molina Healthcare Bull Thesis $MOH
Summary
Transcript
You're about to listen to the yet another value podcast with your host me, Andrew Walker. Today's podcast I have Steve Gorick from Firebird. Back on the podcast, we talk about Molina Health. The ticker there is Mo. See the full disclaimer at the end of the podcast. It's a really fascinating conversation about a really interesting company. You know, this is a longtime compounder. Go look at the stock chart. It's just up and to the right, up to the right, up into the right. And then, you know, starting in July of this year, they get cut basically in half. So, you've got a company that's historically a compounder that is trading at 10xish price to earnings. Uh, should have a long runway for growth. You know, do they return to the compounder status or this is a company that does a lot of Medicaid? Is there a lot of regulatory headwinds, a lot of uh tax headwinds, a lot of all sorts of headwinds. So, really fascinating conversation. We touch on a bunch of different angles here. So, I think you're going to enjoy it. I certainly did. We're going to get there in one second. But first, a word from our sponsor. This podcast is sponsored by portraitanalytics.ai. AI. Portrait Analytics is a whole new way to use AI in investing. They've got a unique set of AI tools that will help you discover, research, and monitor new investment ideas with unprecedented depth, including allowing you to automatically screen and monitor your portfolio while creating summaries of trends and tailwinds that are driving your stocks. But don't just take my word for it. I had a listener email me and tell me, "I've never thanked anyone for helping me to spend thousands of dollars before, but I never would have heard about Portrait Analytics without your podcast, and I'm just thrilled with how much time it's freed up for me to do highle analysis and portfolio management. It's super accurate and reliable. It's been a complete game changer for me. Like my listener said, Portrait is simple to use, super fast, and really intuitive. Check out Portrait Analytics today and see how they can improve your research process." That's Portrait Analysts at portraitanalytics.ai. All right. Hello. Welcome to the yet another value podcast. I'm your host, Andrew Walker. With me today, I'm excited to have on for the second time, Steve Gorick from Firebird Management. Steve, how's it going? >> Hey, Andrew. Thanks for having me again. >> I I'm super excited for this podcast. It's a space near and dear to my heart. Before we get there, quick disclaimer, remind everyone, nothing on this podcast is investing advice. You can go listen to the full disclaimer at the end of the podcast. But Steve, the reason we're talking today is you did I I I think it was at at a conference, but I saw your deck. you did a big big presentation on Molina Healthcare. The ticker is MO. I think it's a super interesting space. You graciously decided to ask if you could come on the podcast. So, I'm super excited, but I'll just pause there and say, what is Molina Healthcare and why are they so interesting? >> Well, Andrew, thanks for that introduction and once again, thank you for having me uh come back to the podcast. Uh Molina Healthcare is a managed care organization. So it's a it's kind of you can think of it as a health insurer but they specialize in uh in running the governmentr run plans and specifically Medicaid plans and uh so they are while there's obviously all different kinds of insurance there's commercial insurance there's Medicaid there's Medicare uh Molina specializes in managing Medicaid plans the way that it usually works is that a so Medicaid is actually an in by the state. So the state decides who is covered uh what portion of the uh who is eligible for Medicaid coverage. They will put out a tender uh a request for proposal to all of the companies in the space uh that will asking to uh who is willing to cover the people and at a particular cost and then the managed care and once the companies that do win the tender and usually it's the population is splited between four or five different winners. The companies that do uh win the tender then actually provide the health insurance service. So they it's their job to find and contract the hospitals, the doctors etc. in order to uh provide the health services to the population that is covered by um uh by the uh by this uh plan. Molina has a market cap of about $10 billion. It covers roughly 5 million people which is >> for those watching the YouTube a little dash for it. >> Yes. up every time. >> Uh she just feels when I'm on I'm I'm on a podcast. >> Uh so uh it's uh it has about five million uh covers about 5 million people. Uh which actually is about 6% of the US population that is on Medicaid. So their market share is relatively small and I think they're the either the third or the fourth largest provider. The biggest ones are the people like Centi, United Healthcare. So other public listed companies. Uh so as I already said about 10 billion market cap uh and annual revenues of about 40 billion uh dollars it's it's actually a little more. The revenues have been growing by about 10 to 15% per year. They go grow through the combination of gaining share. So Molina is pretty effective at uh winning more than their fair share of vendors. Uh and I can get into later for why that is. uh and also through in in part through the acquisitions that they're making where they're buying underperforming um uh other providers in the space, not providers but other other uh insurers insurers in the space. Uh they're under uh they're buying the underperforming ones at a price that is usually quite attractive and then able to improve the profitability and deliver value to shareholders over time. >> That's a that's a great overview. Uh I've got tons of questions. Obviously, healthcare is a really interesting space just overall, but let's just start with elephant in the room. You know, I'm sure the first thing most people do you the the hundreds of thousands of people listening to this podcast, I'm sure the first thing they do when they see a stock is they pop this in, they start listening, and then they pull up the stock chart, right? And if you look at Molina's stock chart, again, the ticker is Mo, you're going to see a ch stock chart that for the past, you know, 20 years has generally been up and to the right. And then this year, you know, they start the year at 300. They continue kind of up and to the right. This stock peaks around 350 and then in July I mean the stock just gets hammered right 300 to 150 inside of a month starting July to the end of August. As you and I are talking the stocks kind of at 185 but the first thing on anyone's mind is going to be hey what drives a 50% decrease in this kind of in a month in this kind of compounder up into the right stock. >> Absolutely and that's a great question and I think you should also look not just at the stock chart of Molina but also at the other companies in the space. So if you look at centin if you look at unh which is slightly different animal elevance wellpoint healthcare so all of the insurers the stock chart will look more or less similar and uh there's two reasons for why we've seen this type of reaction uh one and the main one I think is the significant increase in medical costs so the way if we step back for a second in terms of how the profitability of these companies work for each $100 that they would receive in um uh from the state to help uh kind of to to manage manage the expenses. So >> they're capitated, right? If they take a hundred patients on the p the state may say, "Hey, great. Here's $1,000 per patient for all 100 patients. You guys go manage it. If it cost you $5,000, well, you're really in the hole. If it cost you $500, you guys are going to make a ton of profit." >> Well, so yes and no. So, and that's actually where the difference. So, let's say let's use a number of $1,000. It's actually a little different, but let's use a number of $1,000. The expectation is that out of $1,000 that the state pays to MCO like Molina, they will spend between $850 and $900 on medical costs. Those medical costs include preventative care, hospital care, drugs, you name it, everything combined. And then the remaining 10% is the potential profit for the company. But more often than not that is eaten up by the administrative expenses and and we can get into later. So that and if the number is below 85% and specifically with Medicaid if a number is below 85%. Then the insurers owe a refund to the state because saying well you didn't spend enough and this is actually what happened during co is because you didn't have not enough money was being spent on medical procedures because people were staying home and for various reasons. So at that point the medical costs for the industry fell below 85% insurers owe the refund to the state. What we're seeing right now is actually that but but the upside so from a point of view of what is the highest number for it usually doesn't reach 90 doesn't go above 90%. But right now it is and that is kind of the risk to your point this is the risk that the insurer takes on. uh and we went from that typical range of 85 to 90% and currently for the industry we stand at about 92 which is a big problem because the other part the administrative cost for the industry as a whole is usually around 9 10%. Meaning the industry is unprofitable. Molina and one of the reasons why I really like Molina especially the some of the other names in the space they are the most coste effective player in the space on the administrative side you can think about it kind of I'm a generalist I'm kind trying to put frameworks that work in other industries you can think of Molina as a company that because they are operating just with Medicaid just with these type of customers and they're super low cost they're the Walmart they're the lowcost carrier like Ryan Air they if we think of commodities they are the bottom quartile producer of a commodity from a point of view of costs so when the whole the rest of the industry is unprofitable which is what is the case now Molina is actually still making money not as much money as it used to so normally it operates at about a 4% margin and right now we're at about two so their profitability has half just like the stock stock did stock price did but there's still profitable while the rest of the industry is not. And that's a very important point. >> It's a great the main reason for why we saw the stock chart react as it has is because the medical costs are going up faster than the market has expected. And we can get into reasons for why that is. And what the insurers are saying is that we'll fix that through the higher rates because there is a mechanism to ask for higher rates from the states. and they're saying that we will fix that through this higher rates that we're going to be coming up uh that are going to be repricing call it next year but market is understandably uh understandably skeptical because they're thinking well maybe the the cost may continue to go up so that's the that's the summary great overview there's tons of stuff I want to dive in there but let me just step back before we start diving into specific points of the business and the business model I just want to ask you like the market's competitive place uh you know These are big health insurers, right? Even Molina, one of the smaller, these are big companies, well followed, well trafficked compounders for years. What are you seeing here that the market is missing that makes this kind of an alpha opportunity? >> No, that's a great question. I think what I see in there is that what we have is we have the whole industry is actually suffering from the same problems is that the medical costs are going up faster than uh both the insurers and the analysts have been expecting. What I see from a point of view of Molina and I already mentioned is that because they have lower administrative expenses ratio compared to everyone else. They are able to persevere and survive through this difficult period a lot more so than everyone else. And the other thing is that these insurers are operating at an extremely like if you look at the whole health care sector they have the lowest margin. So when we look at the providers the hospitals etc they will be operating somewhere between six and 10% operating margin. The best players in the space like HCA I think are around 15. When we look at the drug companies they're usually I think the operating margins are around 20 25%. So normal margin for insure is three two to 3% four and from that point of view they are and also the another thing to consider is that the states are not going to do this themselves because in order for a state to do this on their own they will have to do the same thing that what these insurers do which is building up the networks of pro uh building the networks providers figuring out how billing etc. and they do all of this for 2% margin. So from that point of view I'm not sure whether I'm missing something or not but I think I'm fairly comfort uh confident that the states are going to the insurers are going to be able to make a credible case for why they cannot continue to be losing money. Th >> this so let me dive into a few points there because those are great points and they they bring up some of the questions I've had when I've looked at these. I guess the first question is you made the case, hey, these are low margin businesses, right? They they're they're not taking much of which is good, but that brings me to two different points. So, I guess I'll start with the more financial point. I do hear you right all in like their profit margin, whatever it is, their administrative expense are small in the grand scheme of things, but if I just looked, you know, even this year after all the cuts, Molina is going to earn over a billion in net income. They're doing that on four billion of equity with two billion of that being tangible equity. Right? So their roe is somewhere between 25 to 25% to 50% depending if you're using return or return. Now a lot of this is administrative cost. It's a it's a low it's a low capital intensity business. But I would just say like these guys are like insurer/insurer adjacent. And if I look at that type of ROE, that type of return on tangible equity, I'd say, hey, that's really that's actually really high. Why shouldn't the, you know, in Medicare, if you're a company and your ROE, actually, again, they use profit margin for the most part, but if your profit margin gets too high, Medicare will just take reimbursement cuts to you. Why shouldn't the states be looking at this guy and say, "Hey, you're making 25% 50% returns on tangible equity. we need to take your uh required spend from 85 to 88 just because you shouldn't be making this much money administrating these plans. So that would be question one and then I have a a more healthcare focused question. >> Okay. So so I think the first question is actually the answer to it is relatively simple and and it and it goes with the administrative expenses point which I made a couple of times by now. The way that usually these procurements work is that and let's go back to a number of a thousand uh thousand dollars per patient. The there there is a procurement the state puts out an RFP and it selects four insurers called four or five insurers and each one of them gets the same $1,000 per patient. They will spend realistically more or less the same amount on medical costs. Some of them are a little better, some of them a little worse, but they will spend about the same. And let's let's pick a number. Let's let's pick a number that's at the bottom of the range, but let's say 90%. So meaning there's 10% left the rest of it. So the that 10% for most other players in the space, including the big guys like UNH, United Healthcare is eaten up by administrative expenses. And the only reason why Molina is profitable is because for them that number is not 10% but seven. >> Well, let's pause there then. This this jump >> they cannot but to your point they cannot say everyone else gets a,000 and you Molina gets 980. It doesn't work that way. >> Let's jump this is a little bit ahead of my question but I I think since you raised it raised a good question. They've got a slide in their investor from 2024 that shows they're outperforming their peers on everything, right? Their revenue growth has been higher. They've got better administrative expenses as you keep harping on which is a huge huge moat here. All sorts of stuff. But I would just ask why. Why do they have better administrative student expenses? Like if you told me, hey, United Healthcare, which is the largest company, has better administrative expenses because of economies of scale, better tech, whatever, I could start believing this is about the seventh largest, I believe, uh, insure. Why Why should the seventh largest insurer be so much better than everyone else on administrative expenses? Well, I would bring up an example from another industry. Why is Ryan Well, Ryan Air is maybe a bad example because they're quite large, quite large, but why is some of the low cost like Southwest Airlines or the Ryan Air, why are their costs so much lower than it is for the American Airlines or Continental etc. when we're talking about cost be meaning administrative cost is because so Molina has something called and this is some this actually it's interesting to look at the history of Molina because you could see their profitability changed from 2017 when the current leadership has come in this guy Joseky has been brought in from the outside this guy was initially I believe at Etna and he came in and he started installing what is what they call is Molina playbook which is and to me it's kind of similar to the Dana her And there's a number of examples of these uh from other industries where this focus on costs and efficiency and because they're only doing one thing is in their DNA. UNH, which is arguably a great company, and I don't want to spend too much time on it, but because they're doing different things and because they're operating most of the in uh most of the coverage that they provide is for the commercial plans where the medical costs are usually lower, they don't need to be as efficient on administrative expenses. So, this is where the specialization I think makes a huge difference. And this is and because Molina and if you look at before 2017, this was a public company before 2017. It was being run as a glorified nonprofit >> and it was because it was being run by the I think was by the two sons of the founder who was one was the CEO, one of the CFO. That is correct. >> It was a different company. It had higher expenses. They had both the administrative expenses and the medical costs. It was just not being run for profit. It was being run arguably you can call it public good or whatever it is but it wasn't being run for profit. It was growing very fast but it wasn't being run for profit. Since then since Joseky has come in has installed Molina playbook they have continued to deliver growth and continue to gain share but they're doing it from the position of the lowcost provider. And this is kind once again going back to the example of the airlines. There's a reason for why the lowcost carriers are gaining share against the full service providers is because they're providing what people need the b the basic part and not and not some of the other things. That's a great So, it is it's both one of the toughest and it's one of the toughest things, but when you get to write the best things for investors to bet on it, it is literally culture installed systems, like the stuff that I kind of hate because they don't they don't appear anywhere in the spreadsheets except for in the kind of profit margins and roe. You can't really read a 10K and say, "Oh, this company is so much better." It's just kind of in the results. Uh I do have a couple more questions along these lines, but anything else on what I just said or anything you were talking about that you want to hit hit on? >> No. So I think when you the other thing that we didn't really touch on for why these companies are cheap and this is kind of that's the that's the other question. I don't know to what extent you want to get into it is because if we look at the budget that was just passed the one big beautiful bill act >> that's where I was going next. Yes sir. >> Right. So uh if you look at that there are pro number of provisions in there that should reduce and the there's different estimates but uh most of the estimates say that it should reduce the number of people covered by Medicaid by about 10 million people. The current number in the country is about 80 million. So we're talking about and there's that number usually grows over time but we let's call it between 10 and 12% of the people will lose coverage and there's a big question of what does it mean? One of the so we kind of we started talking about for the reasons for why medical costs have been blown out. One of the reasons for why they have been higher than what people expected is because about two years ago after the co uh medical emermergency has been removed uh there was a process called redetermination. So if we step back for a second, what happened is that during CO because we had a medical emergency, anybody who had gained coverage for Medicaid during that period couldn't lose it. And usually the way that Medicaid works, it's a need, it's a needsbased um assistance. So if your life circumstances have improved, you found a job or whatever it is, then you you could lose your or quite often it actually it's because people have forgot to file paperwork the right way, but that's a different story. Um you have what what could happen is that pe people uh would normally lose coverage. they didn't lose that coverage for a couple of years and then when the Medicaid when the medical emergency uh status has been removed all of these people over a period of year lost uh eligibility and that was about 8% of the population that was on Medicaid at the time ended up losing the coverage. What happened during that time is that it just so happened that the people that lost carriage coverage were more often than not the healthier bunch because these are the people that did get a job or are younger. So as a result of that what happened is that because the healthier people got removed from the uh from the coverage the people who were left were less healthy and they needed more uh needed more medical expenses. So that's one of the reasons for what and this is something that insurers I don't think including Molina I don't think they have correctly estimated that when they were talking about the potential impact of redetermination they didn't correctly estimate what that could mean on medical costs and that's for one reasons for why we see the cost go up today and there's fear that with the kind of if the same thing will happen as far as the why people are losing uh coverage for Medicaid as a result of the new budget. >> No, that's great. I >> feel that that could happen again. And once again, we'll see another jump in cost. >> You know, I just when I'm looking at the financials, right, I've got the note from the 10 Q June 30 June 30th, 2024, 4.9 million Medicaid members and they've got 5.6 million overall. So, as they've said, their flagship is the Medicaid, right? That's their flagship. June 30th, 2024, they're down to under 4.8 million. So they shed, you know, a million or sorry, over 150,000 of their 5 million. So that's 3%. It's not nothing. It's not an insane number, but it's not nothing in your flagship franchise. And I think people are looking at, as you said, the one big beautiful bill cuts to Medicaid spending. It cuts to Medicaid spending, all this sort of stuff. And saying, "Hey, are you looking at are we going to be talking about 4.6 million members if we're fast forwarding 18 months?" >> So keep in mind, so they lost three. So yes, they lost about 2 to 3% of the members but the industry lost eight. So they gained share and as I was saying earlier they are gaining share as a result of winning tenders. So they win about 80% of the tenders that they choose to participate in and as a result of buying underperforming insurers. So over this time and their market share I was looking like their market share grows by about 0.2% per year. And if we're talking 80 million people, that's like 160,000 if I if I'm doing the math right per year. So from that point of view, and and they have and they actually do pretty good job. So you already mentioned of their uh 2024 investor day, they do pretty good job of explaining where the growth is going to be coming from. Uh and they're showing that uh because they they're estimating the re revenues will continue to grow at about mid-seen IRS between now and then. And they're saying that between now and then, between now and 2027, about twothirds of that growth has already been secured through the tenders that they want, but they didn't get put put in place yet and the acquisitions that they have made. >> Let me ask a separate question. So, we've talked a little bit about how well let's start with one other. You said a few times, hey, and when I was read when I was reading their 2024 investor day, which these these psychopaths, they had it two days after the presidential election and you know, how can you do that with this is a policy driven business, which I'll come back to in a second, but you know, when I reread that, they talked about rising costs and this was November 2024. The stock is 300. They talk about rising costs. They talk about all this sort of stuff and they talk about how it's a one-time thing, right? How they're getting it sorted out and then you fast forward it to July Q2 earnings, all that sort of stuff. The costs have really continue to rise. I guess I just want to know on the cost like healthcare inflation is not new to anyone, right? It's been off point for the past 30 years. You know, it's one of the first things I can remember from falling markets. Healthcare inflation is right. What is it particularly about healthcare inflation right now that is hitting these guys and everyone so hard and is going like so unexpectedly against their models? >> So one thing is this re redetermination process that I mentioned where you is and it's Medicaid specific where you had people roll off that were healthy. The other thing is and that's something that Molina has mentioned in their quarterly calls is they have underestimated to what extent people will be using things like the behavioral health uh services which it seems like it has become more pronounced that people are using behavioral health more so than they have done in the past. Maybe it's because the stigma about using this has gone away etc. But that is one of the things that they have addressed uh one of the things that they have mentioned. And then also you have the uh the usual culprits like the the drug prices going up. You have the salaries going up uh for uh for doctors and for nurses. So this you're absolutely right. the health care costs are going up and part of where the uh revenue growth for Molina has been coming from in the past is from average uh premium per person that they're earning usually goes up about four 5% per year and the key question is are they going to are the premiums going to go be going up in line with medical costs faster or slower and if we look at the history once again so when we're talking about medical costs they usually fluctuate between 86 and 90% And if medical costs go up faster, then you you will get the premiums repriced. Like if you look at the commentary from people like Sensing, so Sensing, which is they they're the only other public company I saw that is breaking out medical costs for Medicaid specifically because it's a big part of their business as well. For them, medical cost is 94%. Has been a lost for Molina, it was about 90.5 for 19.8, but for Sentinian, it's around 94. They are losing money. and they're saying that we will get rates that would be going up 10% plus and that's going to restore our operational cost. So medical costs will go up to to answer your question medical costs are going up but the question is what happens to the premium and I have to go back to the point is that if medical costs continue to go up faster than the premium the rest of industry will be losing money while while Molina will still be profit. Let me let me ask a higher level question. You know, these guys, I'm with you. The the medical cost, but these are policy dependent people, right? Like if I just said, "Hey, Steve, next year Medicaid's going away, right? This company would be in a lot of trouble, right? Medicaid is relying on the government." And I do think about the the kind of tail regulatory risk. I'm not saying Medicaid's going away. Though I do think part of the worry is the one the big beautiful bill or whatever it is uh does slash a lot of Medicaid funding stuff and I think people are worried about that all that sort of stuff. There's been debates over states optin on Medicaid for year. But if I just said to you, hey, you've got Molina right now trading at let's just call it 10 times price earnings historical compounder all these great sort of stuff you have. But then I said over the next 10 years, right? I I use 10 because 10 times price earnings 10 10 years o over the next 10 years you're going to have two presidential elections. We're going to be gearing up for a third and who knows what happens to Congress, the House, whatever. Medicaid is relying on federal regulations, right? And it is in the crosshairs. How do you get comfortable with kind of the tail risk that Medicaid either, you know, on one form doesn't get slashed by the federal government and these guys are kind of picking up scraps or on the other side, massive expansion of Medicaid to the point where maybe uh there's I I I think massive expansion would be great for them, but maybe massive expansion brings in huge competition or you you know, you could imagine five five different other lines where a massive expansion could change thinking. So how do you just think about that regulatory tail risk in a regulatory driven uh business? >> So massive expansion honestly I haven't thought about but I think to your point I think it would be positive for them because it increases addressable market size for them and they are as you said yourself earlier there's plenty of competition in the field to start with. It's just a question of who can do it more cost efficiently and and I keep arguing that Molina can do that more so than others. As far as the risk of Medicaid going away completely, what I would say is that you have 80 million people under coverage right now. I think it's what 25% of US population. Medicare is another 60 million people. Some of it is double counted, but that's on its own about 20% of US population. All these people vote. And I don't think that any politician would take steps to completely remove this coverage because then you have to come up with a way to cover these people uh provide healthcare another way Medicaid and Medicare. So we and we can step back for a second and talk about kind of effectiveness of US health care and the amount of money that we're spending in US which is I think $17,000 per person or how effective that is. But that is double what everyone else spends in the world. Other OECD countries spend in the world on healthcare. Medicaid and Medicare is actually more costefficient way to provide healthcare than it is for industry as a whole. So if you're talking about a a way to so and right now we're spending 17% of GDP on healthcare costs which is double of what other countries spend. So if there is a solution and I'm not advocating government healthcare in any in any way but if there is a solution anywhere it more likely than to the problem of health care costs rising it looks more like what Molina is doing than what private insurers are doing. Let me ask you a question on uh you know there's been a lot of I think rage is the right term at health insurance health insurance stock you know I the obviously unh one of their uh top brass got literally murdered in the streets of New York City a few months ago but you know I think a lot of it has centered around denials right and we've talked a lot about hey these guys they have to pay out 85 to 90% of what's given but I think a lot of skeptics say hey what they do is they go and price let's use our $1,000 per head, right? They use that and they say, "Great. We're going to pay out $850 per head and then we'll have five $5 per head of administrative expenses. Then we have 10% profit margins." I think what a lot of people do is they say, "Hey, these guys just bid." And then they just deny down to the numbers. So even if something's medically necessary, and you'll see lots of physicians say this, right? Like, "Hey, we're getting denied medically necessary treatment by these guys, and they're doing this because they want to fit us into their cap rate." Right? when you're bidding, your incentive is just to deny, deny, deny, deny, deny down. So, I I want to ask you, it's hard to capture if you know, if you and I were running a health insurance company and we were denying 100% of claims or 99%, we could say, "Hey, we cover people way cheaper than Molina Health is. Now, we're providing terrible service." I just, how do you think about that denial issue? Because I know that it is out there, and I'm not saying it's Molina specific, but I know that it's out there. I know it's something that the health care companies especially the insurance are addressing. I know it's part of the rage at them. So how do you kind of think about that in the long run and just as you think about these companies? >> So there I think there should be a distinction between denying claims and denying procedures. So denying >> Yes, please. and please make that distinction. Yes. >> Right. So den when you denying claims is when some when a procedure has already happened and you have a hospital that's putting putting through uh the code for the insurance to cover this and then they say no we're not going to cover it and then uh with private insurance that cost falls uh on the person and then that ends up you you have a lot of the stories of people going bankrupt and it's a dis and like the system is messed up. what there's but there's also a question of uh whether the procedures that you you're applying for whether they're necessary or not and then so Molina if you look at the kind of and I was trying to dig into well why are they you know they're saying the medical costs are better than average for the industry it actually is about the same if you look at the uh numbers for the industry as a whole um and compared to what Molina is drawing it's about it's it's within uh kind of within range But there are articles out there that saying that Molina will deny procedures more often than other people and that could be one of the ways that uh they are managing claims. But if we step managing their medical costs but if we step back for a second and so once again if we look at the so this is not any patient specific because you can always come up with a anecdotal evidence for somebody that needs to be covered but they're not. But if we look at the US system as a whole, it's actually quite interesting because what you have is on average the number of visits per person in US is lower than for other OECD countries. I think it's four compared to 6,000 people. But the average cost per visit is higher if because there's more procedures happening within these visits. So there's 50% more MRIs. There's I think statistics say that there's 50% more stances being installed in in in cases of some kind of cardiac problems. So once the people come in, they're being overtreated which all costs money but doesn't get us better results. So the life expectancy is worse. There's a lot of different ways where US despite spending twice as much as every other any other wealthy country, US is getting worse results. So from the point of view, if we step back for a second, the client that is deciding whether who is Molina is going to cover is actually at the state. From the state's point of view, they need to provide coverage to the people that keeps them healthy. And if the deni and molina or other insurers start reducing the number of approved procedures because those procedures are unnecessary from the point of view of the outcomes there's no difference. Yes there's some bad headlines but from the point of view of outcomes more likely than not there is no difference. So from that point of view when we're talking about specific cases there's going to be situations where the insurers will make a mistake. Absolutely. But overall US spends too much money on healthcare. And part of reason for why I think we see higher cost in private insurance than we do in Medicaid is because they have higher approval rates. Right? So in Medicaid there's more denials of procedures because it's saying well you don't need it or we will only do it for this price and that's why the cost. >> So I guess what you're saying is in your view Medicaid is they do deny more. Now it's not the denial of procedures that's already happened issue that we've talked about that's it. But they they do deny more procedures but in your view it's actually uh kind of they're they're denying a lot of overt treatment. you you actually think this is a a cure if I I'm saying that correctly. >> It's a it's a I don't want it's a cure to higher costs. It's a cure to cost going up all the uh in the system all the time because it's it's statistically proven that there is more procedures being done in US without better outcomes. I guess you know I know and again now I'm kind of beyond my depth. I'm just knowing what I've seen. I know a lot of doctors and places don't take Medicaid right >> now. Is that because like I I think if I'm going with your point of view, it's because these doctors I mean private insurance pays higher than Medicaid, right? So they're deny it because they'd rather get private insurance, but I I had thought Medicaid just because these states didn't want this or because of Molen and stuff, they were just underchar they were underpaying places, right? But you're saying what they're actually doing is uh they're kind of paying correctly and private insurers are just paying too richly. Is am I stating that correctly? >> Uh yeah, I think that's a fair statement. So uh when so one of the benefit of being benefits of being in general is because we looked at different things over time. So when I when I spoke to when I was looking at the providers and was speaking to them about well kind of how does your profitability work what they what they were saying is that I think it was we lose money on Medicare patients we break even on Medicaid patients and we make all of the money on private insurance patients >> and the profitability depends on the mix that was that was that's what they were saying >> so because there's because there's separation of who pays who gets treated and with private insurance it's even worse because like it's usually it's usually to the employer who pays as opposed to the state and employer for employer is just one of the costs of having the people people on the payroll. That's what that's where that's why those costs are higher than they are for uh for Medicaid and Medicaid does pay less because they negotiate a they negotiate a low lower price and they will pay less for the procedures and to your point some do some doctors will say I will accept it and others say they will not. But one of the things that a very important thing during tenders what uh companies like Molina have to provide and they they talk about that there's about a 2-year um kind of before you can tender there's about two-year period where you are aligning all of the providers that will be providing the medical services to make sure the state wants to make sure that a person will get the coverage that they Right. And that's where actually presence in the states or sometimes and so Molina is is present in some states and not in others and additional vendors that they're doing. It's actually they're already utilizing the same uh network of doctors and hospitals etc. and being able to provide using the same network of doctors. >> That's perfect. Um, I I I want to talk about M&A real quick, but before I I I do there, let me I've I've walked through a couple of different risks or just questions I've had when I've looked at these businesses. And look, I I'm I'm a value investor. You know, I do remember people when UNH UNH was the headline one because, you know, people instantly started saying, "Hey, look at this thing. Look at this stock chart. Let's buy, you know, on a sentiment driven thing, I think." And it's worked out, I'd say, mix for them. If you started buying at 400 when it was down from I I think 600, you haven't done that well. If you started buying at in the high 200s and now it's at 350, you've done pretty well. But I I I guess just having looked at these for a while, we I've walked through a lot of just the random risks that have popped through my head. I just want to ask you, having spent a lot more time on this than me, what kind of keeps you up at night having investment in Molina, right? Like it trades for a low price to earnings. Yes, they've reset a lot of the stuff, but it seems they're temporary headwinds. You've got this great growth outlook. You've got a team that's proven they can do it. What keeps you up at night? What makes you think you might lose money on this investment? >> Yeah, I think what what could break this thesis if the medical costs to your point, and that's something that we discussed earlier, is that the medical costs continue to go up faster than the than the rates. You could have irrational um policy that impacts uh Medicaid in general. And I mean you you could see that with with the with the budget the fact that people are losing Medicaid coverage and that's clearly like that's a negative for the industry. So if you will have uh once again like 10% of the people lose coverage once against the healthy healthier uh group group of people you can have this the period in which the profitability will be lower will be extended. So we're not going to see when you look at company like so if you look at company like sentin that's in the same space I think they have I think 180 billion in revenue and it's a company with 16 16 billion market cap if you apply the normal margin that they used to earn in the past to their numbers the upside is so much and the normal P multiple the upside is so much more than here I like Molina more because I think it's able to persevere through a longer period of disruption than any than other players in the space. And to your point, what keeps me up at night, if I was investor in Centine, I would be very much worried about how long this period takes for them to for the for the rates to catch up with medical cost of Molina because their profitability went down from 4% to 2% but they are still profitable. I'm a lot more comfortable sleeping at night here. And if we kind of if this stock wouldn't trade for the next five years, so so to to Buffett's point, if this stock wouldn't trade for the next five years, do you tell me the market is going to be closed tomorrow? I would be very comfortable with that. >> So in many ways, if I'm just kind of like flipping about mental models, what you what you think you have here is you've got the Exxon Mobile of Medicaid, right? Like they have the they are the lowest cost producers, but in part because of I mean Exon Mobile, >> I have the Walmart of retail. I don't think I don't think >> Walmart agrees on what you said. >> Yeah, Exon is not the most >> you know I I I do already see where you're coming from Walmart, but they're the most efficient. They're the mo lowest cost producer. So, yes, the industry is going through kind of a trout. That's why I chose Exxon because I was going they're going through a truth. But these guys, you know, they're still quite profitable while the industry is going through their trial and everyone else is just bleeding bleeding money. So what's going to happen is at some point the governments have to stabilize this because or else you'll just have every single player will exit the system and nobody will provide Medicaid coverage and >> and some Exactly. and somebody has to do it. >> Yeah. >> So it either has to be an MCO like Molina or it has to be the government itself and they're not going to be able to do it cheaper. >> Okay, that makes total sense. Made total sense. Uh I just want to ask quickly on acquisitions. I I think you've actually touched on the reason why, but I'll still ask because I had um you know, when they talk about their growth, they talk about double digit growth. You can go read their 2024 investor day. They're they're actually still hitting that on the revenue side. It's the cost as you've said that's caused, but their growth is split >> pretty much evenly between organic where they win new business or add more members and inorganic where they go and acquire plans. And I just want to talk a little bit about their inorganic M&A expansion plans because I I'm surprised that there's still small bolt-ons for these guys to do when it seems like the industry has consolidated so much if that makes sense. So I don't I don't remember the numbers exactly but I think if we look at the top five players so the uh Centine uh United Healthcare Wellpoint Humanana Molina they're only like 50% of the industry in terms of the Medicaid coverage >> and the rest is these smaller players >> in that that maybe are present in one or two states or more often not just one state that are covering 100,000 50,000 200,000 people because of the tender that they have wanted And these are exactly the type of companies that Molina usually buys because these guys usually are unprofitable. So they do have revenues, they do have members, but they don't have profits. And Molita usually when they but they so going back to the point of administrative expenses, they will buy guys that have administrative expenses of 10 11%. The medical costs may be the same, maybe a little higher, maybe a little lower, but they will buy guys that have administrative expenses of 10 to 12%. And then they put them through Molina playbook to bring those costs within two to three years down to their levels and have the same profitability. So if you look at the amount of money, I think they spent something like $2.6 six billion dollars in acquisitions over the last um five years. They have acquired about 1.2 million members as a result of this they have acquired about 9 or 10 billion of revenues and if you put their normal margin of what they're earning on this they paid somewhere between five and 12p. So if you apply today's margin it's 12p. If it's their normal margin it's like four. So again, you can pick any number in between. So it seems like a not and to your point and the my company makes the same point, the return on equity is quite high and that return on equity includes the returns on acquisitions. I'm reading the John Malone came out with the memoir and I'm reading it right now and it's funny because what you described is very much like how John Malone talked about TCI in the 80s, their acquisition program, where they just said, "Hey, we're the biggest. We go by we'll go by a small cable company that's making no money, but we know exactly what we're going to take their SGNA down to. We're going to get uh a little bit of benefit because we've got the best programming cost. So, between getting the best programming cost and knowing exactly where the M&A program goes to, like it was almost impossible for them not to accretively acquire someone. And uh this just fits that acquisition model to the tea. And the unfortunate thing is there is a limit to how much they can do it. But the fortunate thing is I I think they've got years of continued bolt-on acquisitions and they always say, "Hey, the pipeline is is kind of popping and everything." Steph, I think we've actually covered most of the stuff I wanted to talk about here. I I I just want to pause here. Is there anything else you think we should be talking about or listener you think listeners should be thinking about when it comes to uh Molina? >> Uh so I don't know to what extent that makes big difference or not, but I did mention the CEO who's been there from 2017. uh he owns uh about 400,000 shares which is uh what is it about 80 90 million so I mean he >> used used to be about 200 250 million >> so he he he he gets paid reasonably well uh I think it was last year that he got and he's about 67 years old and they want him around so they gave him an incentive package to st stick stick around through 2027 through which If he sticks around with 2027 and the company achieves $36 of EPS, by 2027, he gets another 150,000 shares, >> it's a lot of money, >> which is, you know, I'm guessing he's reasonably well off, but it's but it's a number that makes a difference, especially if you put a 10p on on 36. Like, it will be something. Look, you know, it's one of those things where Elon Musk buys a billion dollars of Tesla on the open market and people say, "Well, you know, it's funny to say this. Well, Elon's a trillionaire or whatever he is, right? Like 500 billionaire. This is not that big of an insider purchase for him." And it's like, I hear you, but it is a billion dollars. Like, he cares. And you know, in this case, we just walked through, hey, the the CEO owns, let's just call it 100 million of stock to make the numbers really easy. People can call it whatever that they want. >> $150,000. And as you said, if they do $36 in EPS, it's going to be it's not going to be a $200 stock. It's going to be $400, $560. So, but you know, $150,000 shares, he's going to get 30 million 45 million in stock and comp if he hits it. >> 60 million. >> Yeah. 60 mill that it's half the net worth we just talked about. He's gonna want that. He's gonna want that. He's gonna pull every libert to hit that. >> And it's not lost on me. Like, you know, they they paused their share buybacks. I I believe I I'd have to, but they they buy back about 2% of their shares. They pause it in 2020 in late 2024 when the stocks at 350. Based on how they're talking, I wouldn't be surprised if they're ramping up share buybacks right now. And between that plus inorganic growth, like you can get really accreative. They they get a long way to that 36 just between buybacks and inorganic growth I think. >> Yeah. So they bought back half a billion in the first quarter. They haven't done much in the second quarter but I think they are I think to some extent they saw a deterioration at MCRS and they want to take a pause and and arguably that's a it's a smart decision. What they're doing right now we'll find out in Q3 when they report Q3. I think it's going to be it's going to be a pretty important data point whether they continue continue to buy back shares which means they're comfortable or no they're still pausing and that's going to be important to look at but yeah no I think I think we did cover that >> that's great that's great uh what about would Molina I think there's been rumors some rumblings pass would a United Healthcare or you pick your company Sentine whoever would they would Molina be an acquisition target or between reg DOJ risks Plus, you know, companies with unique cultures tend to be difficult to bolt into bigger companies. Between those two, would is this not a great kind of get acquired? >> Yeah, I don't think Elh has a problem of being too small. Uh, and yes, so I think this is a company that has a different culture. Um, could you buy Molina as a way of fixing your own problems? I guess it's plausible, but none of these come. You can't really use you're not going to use your own shares because they're trading the you can have a merger merger like share for share merger. You can do something like that. I honestly didn't think about it from that point of view. Uh could it be a target? Like we're talking about a $10 billion company. It could be taken private like it's not that huge. Um but but I honestly I I prefer it because I do want to your point that this is a company that has compounded from 2017 even to this day with a share price uh down by 50%. Since Joseph Britzky came in they still compounded at 11% the shares have compounded 11%. Operating cash flow per share which is the metric that we're looking at has compounded at 30%. I'm not saying it's going to compound at 30% from here, but if it compounds at 15 to 20%, I want to keep it for the next 5 10 years, and I think they have the runway to do that. >> Is there any Scooby-Dooing going on here? >> Uh, not that I know. I the the only reason I asked for those who don't know someone at Firebird posted one of my favorite posts of the this month which was uh when a company's management team is intentionally trying to drive the stock down. They they call it Scooby-Dooing because you're the meddlesome kids who are getting in the way of the co if as an analyst you're the medalsome kids who are buying the stock up and getting in the way of the management team driving their stock down. You tell me if I'm saying it wrong, but >> No, you you you're saying this right and I think it's a good opportunity to give a shout out to my my partner Harvey Weeken who wrote that and this is it's his substack. He I think he's he's a phenomenal manager and phenomenal writer and he's really enjoying doing this. So anyone who is listening to this and doesn't follow it, I think they will probably enjoy doing that. >> I I loved the piece. I love the framework. The only thing my only criticism of it would be in the past like he is right. Again I'm reading the John Malone book and I think John Malone the reason he got so rich is he very much Scooby-Dooed when TCI spun out Liberty Media. He very much scooby-Dooed that in my opinion. I'm sure it was 30 years ago. Who cares? But my my only push back on the Scooby-Doo is sometimes I'll talk to management teams. I'll be like I didn't know the term but I'll be like these guys are Scooby-Doo doing it. They're trying to depress the stock price. And then what it actually is is no, these guys suck and they're just the stock is going down because they're really bad. >> It's a great question and I would say that it's something it's a question that we should be asking as analysts all the time. Any company we're looking at, I think these guys have a track record of delivering results. >> Yep. >> I I I only asked because I wanted to bring up Scooby-Doo. I'll ask you this >> and I appreciate that you did. >> Give me a company that's Scooby-Doo in their stock right now. Uh, sorry. Pass. >> Oh man, I knew I knew I was putting you on the spot. I knew it was a tough one. I was hoping to to pull it out. This is good. Uh, Steve, this has been awesome. I've really enjoyed this. Again, I've I didn't even know Falling Knife until I was prepared for this podcast. I didn't even know, but I've just really enjoyed following Firebird stuff. Really appreciate you coming on and uh looking forward to having you on for the third time. >> Thank you, Andrea. This was a pleasure. Thanks again. >> A quick disclaimer, nothing on this podcast should be considered investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial adviser. Thanks.